Developing Sound Banks in Transitional Economies: Structural Reforms in Ukraine

Introduction

There are remarkably parallel developments in many of the banking sectors of earlystage transitional economies which carry so much similar baggage from Communist central planing. More often than not, what is spawned, are fragmented, poorly capitalized banks with highly concentrated lending portfolios (often to insiders) and lax provisioning for emergencies. Government bank supervision, having no history, is embryonic and has limited effectiveness. Banks, in this environment, have little incentive for upgrading.

Unfortunately, but somewhat predictably, major and minor financial sector crises have occurred in several of the transitional economies. Bulgaria is still trying to repair the large extent of damage to the real economy (estimated at 14 per cent of GDP), triggered by the banking sector breakdown last year. And even the Czech Republic, in certain ways a leader in the transition, has experienced dislocation to the real economy as a result of banking failures